Russian Online Travel Booming

According to some estimates, online travel in Russia is a multi-billion dollar opportunity. In which case Serge Faguet might be sitting on something of a gold mine.

The CEO and co-founder of Ostrovok, a Moscow-based hotel-booking service, says the company has grown from seven people at launch in late 2010, to nearly 90 today. It is typical of the speed at which Russian start-ups move.

Mr. Faguet is a serial entrepreneur, having dropped out of an MBA at Stanford after landing $4.5 million funding for his first start-up, Tokbox, from Michael Birch and Sequoia Capital. ”I made every mistake that a 20-year-old entrepreneur can make,” he said.

After getting out of his company just before the financial crisis hit, he sold it to a private equity group, he faced a choice; stay in the Valley or return to his native Russia.

“I went back to Russia for two reasons: phenomenal talent and huge opportunity.”

Russia has a strong bias towards engineering and technology

“Hiring in Silicon Valley is so difficult. It is like a military boot camp. Every engineer you have to fight Google, Facebook, Twitter, Zynga and 200 other start-ups that all have $10 million.

“In Russia it is much easier for us to hire. The number one reason for your ability to succeed as an entrepreneur is your ability to hire great people; especially technical people. In Russia we have always had a strong bias towards engineering and technology.”

His second reason was the sheer scale of the opportunity in Russia.

“It is the land grab, it is the frontier, it is the place where the gold rush is. That is exciting.”

With Kirill Makharinsky, another Russian ex-pat he met in the Valley (Mr. Faguet had worked there briefly) who had been at Quid, the two alighted upon travel.

More than 40% of all the money spent online in the world is spent on travel, but in Russia it was almost virgin territory. While there are other competitors in the travel space, such as Oktogo.ru, Travelmenu and Anywayanyday, Mr. Faguet said they had only one real challenger.

Hotel booking the most profitable market in the online travel sector

“In Russia, Booking.com is the only major competitor.”

Ostrovok concentrates just on hotel bookings. “It is the most profitable market in the online travel sector,” he said.

The company launched in Sept. 2010 and Mr. Faguet has attracted a number of western investors including Accel Partners and General Catalyst, as well as Peter Thiel, Zynga founder Mark Pincus. Niklas Zennstrom’s Atomico also invested in Ostrovok.ru.

Payments are a problem in Russia which is still very much a cash-driven economy.

“The penetration of credit cards is growing,” he said “especially in key cities like St. Petersburg and Moscow.”

Being a local player also has its advantages. Visitors to Moscow will have noticed cash machines throughout the city. These are not ATMs, rather the reverse. They take cash and allow citizens to pay bills.

“You can go to one of the terminals and select Ostrovok. You can also go to some shops and pay in cash through them. We give the customer a code, and the shop will make the payment. There is a fee, but it is about the same as a credit card fee.”

One problem for the Russian travel sector is the requirement for Russians to have visas, which is a bureaucratic, slow process. Mr. Faguet said that the Russian Foreign Ministry is pushing hard to get more visa-free travel.

“There have been a lot of talks with the EU. For example, now the default visa is a one-year multiple entry visa for the Schengen zone.”

The Schengen zone refers to the 25 of the 27 countries in the EU that abolished internal border controls. Only the U.K. and Ireland did not join.

“The only remaining countries that are a problem are the U.S. and the U.K.”

Comments (3 of 3)

Just to respond to the previous comment, global companies don't tend to win in local markets, and Hotels.com (while a great company) doesn't have a single local employee in Russia.

Ostrovok.ru is safer because consumers are protected by (very strict) local consumer protection laws unlike in the case of global companies. We have better localization because we have a large staff of dedicated translators and do not machine-translate content unlike global companies. And we are more convenient for Russians because we have a call center in Russian 24/7, support Russian payment methods and help our consumers with visa issues.

As a result, we are a more popular product in the Russian market: if you look at independent sources (Alexa or Comscore) you will see that Ostrovok.ru is growing much faster and already has more traffic in Russia than Hotels.com.

-Serge (Ostrovok.ru)

12:47 pm November 18, 2011

NP wrote:

Interesting article. Have never heard of Ostrovok.ru although hotel online booking industry in Russia is definitely booming. Personally I use Hotels.com: it’s convenient, safe and is localized, allowing users to benefit from the global size of the company. It’s really strong on the Russian market.

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